White Paper –

Conflicts of Interest: A Framework

May 2017

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© The Institute of Internal Auditors–Australia

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Sydney NSW Australia 2000

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International: +61 2 9267 9155

E-mail: enquiry@iia.org.au

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Table of Contents

Table of Contents...................................................................................... 3 1. Background ........................................................................................ 4

1.1 Purpose .................................................................................... 4 1.2 Background ............................................................................... 4

2. Discussion .......................................................................................... 5 2.1 Issue ........................................................................................ 5 2.2 History ...................................................................................... 5 2.3 Discussion ................................................................................. 5

3. Conclusion .......................................................................................... 9 3.1 Summary .................................................................................. 9 3.2 Conclusion ................................................................................. 9

4. Bibliography and References ............................................................ 10 Bibliography ......................................................................................... 10 References ........................................................................................... 10 Purpose of White Papers ........................................................................ 10

5. Author’s Biography ........................................................................... 10 6. About the Institute of Internal Auditors–Australia ......................... 111 7. Copyright ........................................................................................ 111

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1. Background

1.1 Purpose

It is apparent from many investigations and reports from anticorruption bodies and

regulators that conflicts of interest are a major threat to governance, compliance and

ethical standards and cultures and a significant contributor to corruption.

In this white paper a framework is provided to operate in a comprehensive manner to

reduce the risks associated with conflicts of interest and resultant fraud and corruption.

The framework may be used in designing governance structures and internal controls to

mitigate the risks associated with conflicts of interest, enhance compliance processes,

assist in probity projects and help auditors and investigators. It may be applied to

employees, those providing services to an organisation and those who are likely to be seen

as representing the organisation.

1.2 Background

Conflicts of interest are closely associated with corruption. For example it has been noted

that conflicts of interest “can be an indicator, a precursor, or a result of corruption”.1

Conflicts of interest and corruption are intertwined as a conflict of interest exists where an

official could abuse his or her position for private gain, whereas corruption exists where an

official does abuse his or her position for private gain2. In practice conflicts of interest exist

on a spectrum of severity.3

A structured and comprehensive approach to dealing with conflicts of interest and

associated fraud and corruption is considered useful for practitioners, auditors and

investigators.

1 Managing Conflicts of Interest, Asian Development Bank, Organisation for

Economic Co-operation and Development, 2008, p xiii. 2 P. Catchick, Conflict of Interest – Gateway to Corruption, Fraud Magazine,

January/February 2014, accessed on http://www.fraud-

magazine.com/article.aspx?id=4294980862 on 12 April 2017 3 Conflicts of interest, National Audit Office, United Kingdom, 2015, p. 6

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2. Discussion

2.1 Issue

Conflicts of interest are a significant contributor to corruption and should be

handled appropriately by any organisation.

2.2 History

Conflicts of interest have become a key issue of public interest and debate in recent years

in both the private and public sectors4.

It is considered leading practice to implement policies, processes and governance

structures to help ensure that conflict of interest situations are dealt with ethically and

within the accepted probity principles.

In many jurisdictions if a decision-maker has a conflict of interest, the decision may be

vulnerable.5

2.3 Discussion

There are many definitions of conflicts of interest. In broad terms a conflict of interest may

be considered to exist where a reasonable person might perceive that an individual may

be influenced in their work to place their own interest ahead of the organisation’s6. The

definition may also be adapted for legal entities.

An example of a definition is: “A conflict of interest is a set of circumstances that creates

a risk that an individual’s ability to apply judgement or act in one role is, or could be,

impaired or influenced by a secondary interest. It can occur in any situation where an

individual or organisation (private or government) can exploit a professional role for

personal or other benefit. This definition is based on generally accepted standards.”7

Conflict of Interest Control Framework

The framework for controlling conflicts of interest is to:

1) Clarify conflicts of interest for everyone at risk so that they can recognise

conflict of interest situations and know what they need to do.

2) Help people avoid the conflicts of interest that should be avoided.

3) Require individuals to declare formally and properly any conflicts of interest

that they may have.

4) Require individuals to manage their conflicts of interest with their managers

and monitor the situation.

5) Deal with breaches of the rules so that infringements are properly

investigated and remedial action taken.

4 For example see OECD Guidelines for Managing Conflict of Interest in the Public

Sector, OECD Policy Brief, September 2005. 5 For example Article 6 of the European Convention on Human rights and articles

41 and 47 of the EU Charter of Fundamental Rights enshrine the principle that

decisions should be made free from actual and apparent bias. 6 This would include the interests of close friends and family. 7 Conflicts of interest, National Audit Office, United Kingdom, 2015, p. 6

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If the framework is properly implemented it should operate as an inverted triangle so that

each step contributes to a comprehensive approach, reducing the effort and resources

required for the next steps.

Diagram A: Process in an Organisation to Deal with Conflicts of Interest

Clarify

It is essential that people understand what constitutes a conflict of interest and what they

need to do if they may have one. If they do not understand conflicts, they will not know

how to avoid those that should be avoided, declare conflicts properly or avoid favouring

their own interests. If people do not know how to recognise conflicts and what to do, the

likelihood of corruption increases dramatically.

Activities to clarify conflicts should generally include an appropriate section in the code of

ethics/conduct, training that includes conflicts of interest and ready access to information

about conflicts. The measures taken should be in line with the risks attached to possible

conflicts of interest. Where the risks are high, best practice might include a policy and/or

written procedures on conflicts, easy access to detailed information which includes relevant

examples and likely questions, training that addresses in detail the relevant situations that

may be faced, regular reminders and easy access to specialist advice.

Examples of high risk activities may include tendering, hiring and other decisions with high

levels of discretion and significant probity requirements.

BreachesManage & Monitor

DeclareAvoidClarifyCOI

Control

Clarify Conflicts

Avoid Unnecessary Conflicts

Declare Conflicts

Manage & Monitor Conflicts

Deal with Breaches

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Avoid Unnecessary Conflicts

There are many conflict of interest situations that are easily and beneficially avoided. This

includes not interacting with people over whom one makes significant discretionary

decisions in a way that could give rise to the perception of a personal interest. It is easy

to avoid socialising with or accepting large gifts, benefits or hospitality from such people.

In some industries or sectors there is a significant risk of your organisation’s employees

being sought out and groomed in the expectation of more favourable treatment by them

in discretionary matters. Secondary employment rules should be implemented to avoid

conflicts.

Declare Conflicts

Conflicts of interest should always be declared in writing. This avoids disputed accounts of

what was actually said and whether the full extent of the conflict was properly declared.

Conflicts of interest should be declared to people at a sufficiently senior level in the

organisational structure or to a central area. If a conflict of interests register is maintained

by the organisation, there should be a process to ensure that all declared conflicts are

entered in the register.

In addition to the above declaration structure, conflicts of interest should also be formally

disclosed for processes where probity is an important issue. Examples include hiring,

tendering, high value asset disposals and the selection of entities for significant business

relationships. In these cases the declaration should always be documented and fully

minuted.

Manage and Monitor Conflicts

The relevant manager should review the written declaration of a conflict and, together with

the individual who has the conflict, work out a plan for managing the conflict. There should

generally be guidelines to assist the managers to assess what actions are appropriate in

different situations to adequately manage the conflict.

The default for serious breaches should ideally be for the employee to have no further

involvement in the situation. This is not always practical and other alternatives might be

considered.

The management plan should typically include the requirements for the employee to:

ExplainSet

RulesClarify

Other Avoidable Situations

Gifts and benefits

GroomingAvoid

For the Process

In Writing

Declare

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always place the organisation’s interests ahead of any personal interests;

not communicate with other employees or entities acting on behalf of your

organisation in a manner that could be perceived as trying to influence their

conduct or decisions in relation to the matter;

not obtain documents and information from the organisation relating to the

particular decision, transaction or matter;

not use the organisation’s resources, or those of an entity acting on behalf of

or for the organisation, for their personal interests in a conflict of interest

situation;

monitor the conflict of interest situation;

make a new declaration in a year’s time if the conflict still exists; and

make a new declaration if the employee’s personal interests or role in the

organisation changes significantly.

Where a person no longer deals with a matter because of conflicts of interest, that matter

should generally not be handled by a subordinate. The person handling the matter should

never be supervised on that matter by the person with the conflict.

The management plan should be signed by both the manager and the employee. If a

register of conflicts of interest is maintained it may be appropriate to have a copy of the

management plan placed in the register.

The manager should periodically monitor that the employee is complying with the

management plan.

Deal with Breaches

Breaches of the code of conduct or policy requirements should result in the matter being

properly investigated and where appropriate, action being taken. The action may include

disciplinary action, discretionary decisions being reconsidered, contracts being cancelled or

renegotiated, administrative action being taken against entities associated with the

employee’s personal interest, legal action against the employee or other entities, reporting

to regulators or anti-corruption bodies and preparing police briefs if criminal acts appear

to have occurred.

Notify changes

Put Organistaion

First

Monitor Situation

Comply with Approved

Plan

Manage & Monitor

Legal Action

Admin Action

InvestigateBreaches

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3. Conclusion

3.1 Summary

The framework for controlling conflicts of interest is to clarify conflicts of interest for

everyone at risk so that they can recognise conflict of interest situations and know what

they need to do, help people avoid the conflicts of interest that should be avoided and

require people to declare formally and properly any conflicts of interest that they may

have, manage their conflicts of interest with their managers and monitor the situation and

deal with breaches of the rules so that infringements are properly investigated and

remedial action taken.

3.2 Conclusion

If conflicts of interest are not dealt with properly, the risks associated with fraud and

corruption are likely to increase significantly.

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4. Bibliography and References

Bibliography

Conflicts of Interest and Risk Governance, Carlo V. di Florio, U.S. Securities and

Exchange Commission, 2012, https://www.sec.gov/news/speech/2012-

spch103112cvdhtm accessed on 12 April 2017

Managing Conflicts of Interest in FMA Agencies, Australia National Audit Office, 2014,

Canberra

Managing Conflicts of Interest in the Public Sector – Guidelines, 2004, Independent

Commission Against Corruption and Crime and Misconduct Commission Queensland

Managing Potential Conflicts of Interest Arising from the Bank's Commercial Activities,

Reserve Bank of Australia, http://www.rba.gov.au/payments-and-

infrastructure/payments-system-regulation/conflict-of-interest.html accessed on 12 April

2017

Related party transactions - Regulatory Guide 76, Australian Securities & Investments

Commission (ASIC), 2011

References

Managing Conflicts of Interest, Asian Development Bank, Organisation for Economic Co-

operation and Development, 2008

P. Catchick, Conflict of Interest – Gateway to Corruption, Fraud Magazine,

January/February 2014

Conflicts of interest, National Audit Office, United Kingdom, 2015

Purpose of White Papers

A White Paper is an authoritative report or guide that informs readers concisely about a

complex issue and presents the issuing body's philosophy on the matter. It is meant to

help readers understand an issue, solve a problem, or make a decision.

5. Author’s Biography

This White Paper written by:

Barry Davidow BCom, B.Acc, MTaxLaw, ACA, CFE, CRMA, PFIIA, Advanced Diploma of Government (Management), Diplomas in Risk Management and Business Continuity, Government (Fraud Control), Government (Investigation) and International Financial Management.

Barry is a Director of Fraud Prevention & Governance Pty Ltd and has over 20 years’

experience in internal audit, fraud and corruption control, investigations, governance and

compliance. He has contributed to books on fraud control, computer fraud, communications

and sociology. He co-authored the IIA Australia white papers on Fraud Risk Indicators,

Corruption Indicators in Internal Audit and Corruption-related risks in decision-making.

Matthew Lyon BComm, CPA, MIAA

Matthew has been involved in internal audit for 10 years in the NSW Government. Prior to

this he was Financial Accountant for Catholic Education Office Parramatta. He spent 15

years with the Audit Office of NSW, the last four as engagement manager. He has also

served in a number of charities and the Wollongong Council Audit and Finance Committee.

He co-authored the IIA Australia white papers on Fraud Risk Indicators, Corruption

Indicators in Internal Audit and Corruption-related risks in decision-making.

This White Paper edited by:

Michael Parkinson BSc (Hons), Grad Dip Computing, PFIIA, CIA, CRMA, CISA, CRISC

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6. About the Institute of Internal Auditors–Australia

The Institute of Internal Auditors (IIA) is the global professional association for Internal

Auditors, with global headquarters in the USA and affiliated Institutes and Chapters

throughout the world including Australia.

As the chief advocate of the Internal Audit profession, the IIA serves as the profession’s

international standard-setter, sole provider of globally accepted internal auditing

certifications, and principal researcher and educator.

The IIA sets the bar for Internal Audit integrity and professionalism around the world with

its ‘International Professional Practices Framework’ (IPPF), a collection of guidance that

includes the ‘International Standards for the Professional Practice of Internal Auditing’ and

the ‘Code of Ethics’.

The IPPF provides a globally accepted rigorous basis for the operation of an Internal Audit

function. Procedures for the mandatory provisions require public exposure and formal

consideration of comments received from IIA members and non-members alike. The

standards development process is supervised by an independent body, the IPPF Oversight

Council of the IIA, which is appointed by the IIA–Global Board of Directors and comprises

persons representing stakeholders such as boards, management, public and private sector

auditors, regulators and government authorities, investors, international organisations,

and members specifically selected by the IIA–Global Board of Directors.

The IIA–Australia ensures its members and the profession as a whole are well-represented

with decision-makers and influencers, and is extensively represented on a number of global

committees and prominent working groups in Australia and internationally.

The IIA was established in 1941 and now has more than 180,000 members from 190

countries with hundreds of local area Chapters. Generally, members work in internal

auditing, risk management, governance, internal control, information technology audit,

education, and security.

Historians have traced the roots of internal auditing to centuries BC, as merchants verified

receipts for grain brought to market. The real growth of the profession occurred in the 19th

and 20th centuries with the expansion of corporate business. Demand grew for systems of

control in companies conducting operations in many locations and employing thousands of

people. Many people associate the genesis of modern internal auditing with the

establishment of the Institute of Internal Auditors.

7. Copyright

This White Paper contains a variety of copyright material. Some of this is the intellectual

property of the author, some is owned by the Institute of Internal Auditors–Global or the

Institute of Internal Auditors–Australia. Some material is owned by others which is shown

through attribution and referencing. Some material is in the public domain. Except for

material which is unambiguously and unarguably in the public domain, only material owned

by the Institute of Internal Auditors–Australia–Global and the Institute of Internal

Auditors–Australia, and so indicated, may be copied, provided that textual and graphical

content are not altered and the source is acknowledged. The Institute of Internal Auditors–

Australia reserves the right to revoke that permission at any time. Permission is not given

for any commercial use or sale of the material.

8. Disclaimer

Whilst the Institute of Internal Auditors–Australia has attempted to ensure the information

in this White Paper is as accurate as possible, the information is for personal and

educational use only, and is provided in good faith without any express or implied warranty.

There is no guarantee given to the accuracy or currency of information contained in this

White Paper. The Institute of Internal Auditors–Australia does not accept responsibility for

any loss or damage occasioned by use of the information contained in this White Paper.

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